Japan’s consumer price development is remarkable by Japanese standards over the last few decades – the inflation rates for Japan and the greater Tokyo area are too high.
On October 24, the Statistics Bureau of Japan released September consumer price data. According to “e-Stat”, inflation over a 12-month period for all of Japan was 2.9 percent in September; in August it was 2.7 percent. In September 2024, annual inflation was 2.5 percent. The next inflation data for the reporting month of October will follow on November 21st.
If you take a longer-term look at the time series from the Japanese Statistical Office, you will see 12-month inflation values that are above the Bank of Japan’s 2 percent inflation target for well over three years.
BoJ decided to pause interest rates in October – interest rate hike possible in December
Despite inflation still being too high, the Japanese central bank “Bank of Japan” (BoJ) decided against raising interest rates at its most recent meeting at the end of October. The Japanese key interest rate therefore remained at 0.50 percent. However, an increase to 0.75 percent by the end of the year cannot be ruled out. Although inflation would remain well above the target value of 2.0 percent for a longer period of time at 0.75 percent, the negative real return would at least be reduced somewhat.
Interest rates in the USA and Japan could develop in opposite directions
With regard to one of the most important currency pairs in the global foreign exchange market (USD/JPY is the second most traded currency pair in the world after EUR/USD), one movement in the foreign exchange market that should be gradually reduced in the foreseeable future is that of the classic yen carry. This doesn’t happen overnight, it’s a gradual process that takes weeks and months, but it should happen.
Why this? Well, the interest rate differentials are likely to develop against the US dollar sooner or later. This would be the case because interest rates in the US dollar area and the yen area are developing in opposite directions.
If the Federal Reserve cuts again by 25 basis points in December, but the BoJ increases by 25 basis points, a distance of 50 basis points would already have been covered or the interest rate difference would have fallen from 350 to 300 basis points. In 2026, the difference could shrink to up to 200 basis points if interest rates were cut to up to 3.00 percent in the USA and increased to up to 1.00 percent in Japan.
The narrowing interest rate gap is likely to result in a partial repatriation of Japanese fixed assets and thus strengthen the yen.
USD/JPY – what does the currency pair look like from a chart perspective?
The present analysis is based on a daily chart. In order to be able to define the goals of the bulls and bears in more detail, a Fibonacci analysis would be used. The respective Fibonacci retracements and Fibonacci projections can be generated using the web-based trading platform “ActivTrader” and could then be used to derive the top and bottom targets.
Starting from the record high of July 3rd, 2024 of 161.946 to the low of September 16th, 2024 of 139.571, the next resistance would be at the marks of 156.666 (0.764%) and 161.946 (1.00%). Furthermore, attention should be paid to the upside projections of 167.227 (1,236%), 170.493 (1,382%) and 175.774 (1,618%). On the downside, supports would be at 153.399 (0.618%), 150.759 (0.50%), 148.118 (0.382%), 144.852 (0.236%) and 139.571 (0.00%). The three EMAs (EMA50 in purple color, EMA100 in blue color and EMA200 in red color) were also added to the chart image.
On the upside, the target could be tested around the 1.00% Fibonacci retracement area of 161,946. On the downside, a target would be around the 0.382 percent Fibonacci retracement of 148.118. At the time of this analysis, the relative strength index (RSI) still indicated a neutral market condition at 67.52 points.
Source: ActivTrader
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